Risks and Uncertainties in

International Business

Risk Definition:

The level of exposure to uncertainties that the enterprise must understand and effectively manage as it executes its strategies to achieve its business objectives and create value (Deloach, 2000)

Quantifying Risk Risk = Probability (of the event) X Business

impact (severity of the event) Difference between risks and uncertainties:

risks can be calculated, uncertainties are genuinely unknown.

Risk Factors The risks of doing business in a (different)

country are determined by a number of political, economic, and legal factors.

Therefore, generally, there are 3 types of risks in international business: political risks, economic risks, and legal risks

Political risks The likelihood that political forces will cause

drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise

Political risks Therefore, political risks tend to be greater

in countries experiencing social unrest and disorder, or

In countries where the underlying nature of society increases the likelihood of social unrest

Economic Risks The likelihood that economic

mismanagement will cause drastic changes in a country’s business environment that adversely effect the profit and other goals of a particular business enterprise

Economic risks Economic risks arise from economic

mismanagement by the government of a country

Usually interrelated to political risks A visible indicator economic

mismanagement tends to be a country’s inflation rate, and/or level of business and government debt.

Legal Risks The likelihood that a trading partner will

opportunistically break a contract or expropriate property rights.

Natural (Disaster) Risks The likelihood that natural disaster will

cause severe damage to the company’s assets/ cause major business interruptions

Natural Risks 2 types:

Nature Man-made

Nature: Avalanche, blizzards, droughts/extreme heat,

earthquake/tsunami, floods, fires (forest fires), hurricanes, tornadoes etc.

Man-made: Dams or locks, severe environmental pollution, severe

building collapse, explosions, transportation incidents etc.

SOURCES OF RISKS

Physical environment Social environment Political environment Operational environment Economic environment Legal environment Cognitive environment

RESOURCES EXPOSED TO RISKS

Physical resource exposures Human resource exposures Financial resource exposures

Risk Management

The process whereby decisions are made to accept a known or assessed risk and/or the implementation of actions to reduce the consequences or probability of occurrence.

Risk management major components

4 major components: Risk identification Risk analysis Risk reducing measures Risk monitoring

End.

Thank you.